Rate cut could be around the corner

Australian September quarter GDP rose 0.3 per cent quarter on quarter, or 2.7 per cent year on year.

This was below our own and market expectations for 0.7 per cent quarter on quarter or 3.1 per cent year on year.

In terms of the expenditure drivers: trade added 0.8 percentage points to growth as export volumes remain strong, but consumer spending (up 0.5 per cent quarter on quarter) was weaker than expected, non-dwelling construction (down 6.7 per cent quarter on quarter) fell more than expected as the mining investment slump continues to impact and public investment and inventories detracted more than expected from growth.

Terms of trade are continuing to slide (down 3.5 per cent quarter on quarter, or 8.9 per cent year on year) as commodity prices continue to fall, and this is weighing heavily on national income.

The ABS’ measure of real gross domestic income (which adjusts GDP for the reduced national purchasing power flowing from the falling terms of trade) fell 0.4 per cent and is now down for two quarters in a row resulting in an “income recession” (using the two consecutive quarters rule of thumb).

There were some positives.

In particular, productivity growth is running around 2 per cent per annum, which is well up from several years ago; the household savings rate remains high at 9.3 per cent, indicating that households have a reasonable buffer that they can draw on; and growth in export volumes is strong as resource investment projects are completing.

And the two-speed economy is really going into reverse, with real final demand up 1.3 per cent quarter on quarter or 4.7 per cent year on year in NSW, but down 2 per cent quarter on quarter or down 4.8 per cent year on year in Western Australia.

There is also a danger in dwelling two much on the slump in real gross domestic income flowing from the falling terms of trade.

While we have now had two quarters of decline on this measure resulting in an “income recession”, it’s not actually a new phenomenon as we also had income recessions in 2011-12 and through the GFC.

More importantly, while swings in the mining and energy export prices are very important for resource companies and hence for government revenues their impact on the rest of the economy is far more modest.

For example, real gross domestic income surged through 2010-11 suggesting a booming national economy but at the time the “two speed economy” was at its worst with sectors like home building, retailing, tourism and manufacturing really struggling. Now these sectors are starting to come back to life to varying degrees.

The September quarter national accounts are actually consistent with the RBA’s forecast for GDP growth to slow to 2.5 per cent for the year to the December quarter this year, and we continue to see growth picking up to around 3 per cent next year as the rebalancing of the economy continues.

However, with the terms of trade falling sharply the risks are skewed to the downside and so if more assistance to the economy is not delivered by a further fall in the value of the Australian dollar in the months ahead there is a now a high chance that the RBA will respond with another rate cut early next year.